Financial Accounting: GAAP Principles 3e

Tutorial 7.1
(Solution included in
SQB)

Chapter 7

Determining the cost of

inventory

Basic level

Ignore VAT.
Timeline Limited sells various products. The current financial year-end of the company is
28 February 20x6. The company has always applied the following accounting policy to its
inventory:
Inventory on hand is measured at the lower of cost and net realisable value. Cost is
determined based on the first-in-first-method.
One of its products is calendars that are printed with local themes and sold to wholesale
customers at a normal selling price of R55 each. The supplier of the calendars charges for
transport and handling fees. The transport cost is charged per batch, and the handling fees
are charged at 10c per calendar.
The following batches of the Garden Route product range of the 20x6 calendar year was
received (excluding any handling fees charged):
Batches received:
On 10 June 20x5
On 2 December 20x5

Garden Route
calendars, at cost
800 @ R22,00
2 500 @ R25,45

Transport cost
R61
R125

The calendars were sold as follows:

Date:
20 October 20x5
5 November 20x5
12 January 20x6

Garden Route calendars

Quantities sold
500
250 *
(order received for 300)
2 260

* When the calendars were sold on 5 November 20x5, the packers noted that
there were only 250 copies of the Garden Route calendars on hand. The
missing calendars could not be found.
Calendars not sold by 31 December 20x5 are sold at a reduced price of 80% of normal
selling price from 1 January 20x6. Calendars not sold by 28 February 20x6 are considered
obsolete and can be sold at only 20% of the normal selling price.
Required:
1.
2.
3.

Calculate the cost price per unit of Garden Route calendars on hand at 28 February
20x6, by applying the first-in-first-out formula.
Assuming that the weighted average costing formula (calculated at each reporting
date) is used to determine cost, calculate the cost price per unit of Garden Route
calendars at 28 February 20x6.
Calculate the carrying value of Garden Route calendars to be recognised as inventory
in the statement of financial position at 28 February 20x6.
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Financial Accounting: GAAP Principles 3e

4.

Chapter 7

Calculate the amount to be recognised as cost of sales in the statement of

comprehensive income of Timeline Limited for the year ended 28 February 20x6.
5.
How would your answer in 4 above differ if the company applied the weighted
average costing formula to inventory?

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Financial Accounting: GAAP Principles 3e

Tutorial 7.2

Chapter 7

Costing calculations

Basic level

Ignore VAT.
1.

Sammy Limited incurred the following transactions relating to Product S105:

1 May 20x6
3 May
7 May
14 May
24 May
28 May

Cost per unit

R95
R100
R110

Opening balance
Purchases
Purchases
Sales
Purchases
Sales

R107

No of units
80
110
200
(180)
140
(95)

Required:
Calculate the cost of Product S105 at 31 May 20x6 when applying:
(a) the first-in, first-out costing formula
(b) the weighted average costing formula (calculated on a monthly basis)
December 20x6 (its reporting date):
Bricks:
Type A
Type B
Type C
TOTAL

Quantity on hand
160 500
106 600
108 500

Cost price
R46 545
R47 970
R34 720
R129 235

Net realisable value

R48 000
R46 700
R33 020
R127 720

Required:
Calculate:
(a) The carrying value of inventory to be recognised in the Statement of financial
position of Alpha Limited at 31 December 20x6 (in compliance with IAS2) amounts
to R_________ .
(b) The amount of the write down of inventory for the year ended 31 December 20x6 (if
any), amounts to R__________ .
3.

An importer recorded the following transactions relating to a shipment of inventories that

was received on 15 January 20x7:
5 000 units at landed cost of R25 per unit
Import duties
Commissions paid to import agent

R125 000
12 500
50 000

When the units were unpacked, he found that 50 of the units were damaged and could
not be sold. The damaged units had no resale value and had to be scrapped.
The importer sold 1 800 units by the end of January 20x7 at a selling price of R67,50 per
unit.
Required:
Determine the importers gross profit for January 20x7.

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Financial Accounting: GAAP Principles 3e

Tutorial 7.3

Costing calculations

Chapter 7

Basic level

In each of the following questions, select the CORRECT answer:

1. A retailer imported goods and paid R171 600 in cash (which included R12 000 for
commissions charged by the importing agents and VAT amounting to R19 600) when
collecting the goods at the harbour. The risks and rewards of ownership of the imported
goods transferred to the retailer upon collection of the goods from the harbour
warehouse. The retailer incurred R5 000 to transport the goods to its retail outlet and a
further R8 000 in delivering the goods to its customers. Selling expenses amounted to
R15 000. The retailer is a registered VAT vendor.
The cost of purchase of the goods is:
(a) R176 600
(b) R199 600
(c) R165 000
(d) R157 000
(e) None of the above
2. A retailer buys 800 units of a good from a supplier for R500 per unit, on a 30 days
interest free credit (normal credit terms). To encourage early settlement the supplier
awarded the retailer a 10% early settlement discount for settling within 10 days of buying
the goods.
The cost of purchase of the goods is:
(a) R360 000
(b) R400 000
(c) R440 000
(d) R396 000
(e) None of the above
3. A retailer acquired an item of inventory for R600 000 and negotiated a two-year interestfree credit payment term. An appropriate discount rate (market rate for similar debt) is
8% per year. Round to the nearest R1 000.
The cost of purchase of the inventory item is:
(a) R600 000
(b) R648 000
(c) R552 000
(d) R514 000
(e) None of the above
4. A retailer transfers interchangeable items of inventory, with a normal selling price of
R480 000, to its branch in Stellenbosch. The retailer maintains a gross profit margin of
50%, and transfers inventory to the branch at an 80% mark-up on cost. The cost price
and transfer price of the inventory respectively amounts to:
(a) Cost price: R240 000 and Transfer price: R432 000
(b) Cost price: R160 000 and Transfer price: R288 000
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Financial Accounting: GAAP Principles 3e

Chapter 7

(c) Cost price: R160 000 and Transfer price: R320 000
(d) Cost price: R333 333 and Transfer price: R266 667
(e) None of the above
5. A retailer transfers interchangeable items of inventory to its branch at a mark-up of 25%
of cost. The branch adds a further 25% mark-up on the transfer price when selling the
inventory to its customers. The branchs sales for the year amounted to R100 000 and it
had inventory on hand at 28 February 20x10, its reporting date, amounting to R36 000
(at transfer price).
5.1 The cost of sales, to be included in the profit of loss of the retailer (that is, the entity),
for the year ended 28 February 20x10, amounted to:
(a) R80 000
(b) R70 000
(c) R56 250
(d) R50 000
(e) None of the above
5.2 The gross profit realised by the head office on inventories sold by the branch during
the current reporting period, amounted to:
(a) R16 000
(b) R20 000
(c) R30 000
(d) R36 000
(e) None of the above
5.3 Assume that all the inventory on hand at the branch at 28 February 20x10 (that is, at
the transfer price of R36 000) was obsolete, and that the branch might be able to
sell the inventory on sale in the new financial year at only R35 000, after incurring
selling costs of R3 000. This inventory should be measured by the retailer (that is,
the entity) at 28 February 20x10 at:
(a) R32 000
(b) R33 000
(c) R28 800
(d) R25 800
(e) None of the above
6. A wholesaler sells interchangeable vitamin cool drinks. The following movements in
inventory occurred during the financial year ended 28 February 20x10:
Date

Description

Units

1 March 20x9
4 June 20x9
22 August 20x9
2 November 20x9
16 January 20x10
28 February 20x10

Opening balance
Sold
Purchased
Sold
Purchased
Closing balance

25 000
(20 500)
45 000
(47 500)
30 000
32 000

Total cost
R
62 500
?
126 000
?
73 500
?

All amounts should be rounded to the nearest whole rand.

Ignore VAT.
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Financial Accounting: GAAP Principles 3e

Chapter 7

6.1 The cost of inventory on hand at 28 February 20x10, measured by using the FIFO
method, amounted to:
(a) R80 000
(b) R79 100
(c) R78 400
(d) R89 600
(e) None of the above
6.2 The cost of inventory sold during the financial year ended 28 February 20x10, where
inventory is measured using the FIFO method, amounted to:
(a) R184 250
(b) R166 600
(c) R182 900
(d) R182 000
(e) None of the above
6.3 The cost of inventory on hand at 28 February 20x10, measured using the weighted
average formula, and calculated at 28 February 20x10 (periodic method), amounted
to:
(a) R83 840
(b) R78 400
(c) R85 129
(d) R80 000
(e) None of the above
6.4 The cost of inventory sold during the financial year ended 28 February 20x10, where
inventory is measured using the weighted average formally at the reporting date
(periodic method), amounted to:
(a) R182 000
(b) R178 160
(c) R176 871
(d) R183 600
(e) None of the above
6.5 The cost of inventory on hand at 28 February 20x10, measured using the weighted
average formally, and calculated every time a shipment is received (perpetual
method), amounted to:
(a) R79 045
(b) R83 840
(c) R78 400
(d) R79 100
(e) None of the above
6.6 The cost of inventory sold during the financial year ended 28 February 20x10, where
inventory is measured using the weighted average formally and calculated every
time a shipment is received (perpetual method), amounted to:
(a) R182 000
(b) R183 600
(c) R178 160
(d) R182 955
(e) None of the above

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Financial Accounting: GAAP Principles 3e

Tutorial 7.4

Chapter 7

Branches

Basic level

Footwear Limited has its head office in Cape Town and a branch in Stellenbosch. On 30 June
20x3 the following summarised trial balances were prepared:
Head office
Dr
Share capital
Branch current account
Head office current account
PPE
Cash at bank
Debtors
Creditors
Goods send to branch
Branch trading account
Inventory (1 July 20x2)
Purchases
Goods received from head-office
Net sales
Salaries and wages
Other operating expenses

Cr
150 000

Branch
Dr

Cr

28 000
25 600
80 000
30 100
9 500

15 000
3 200
11 300
30 000
4 000

21 000
55 000

4 900
11 000
6 300
31 020

61 000
15 000
17 700
256 300

256 300

37 000
680
500
67 500

67 500

Additional information:
1. The head office has sent inventory with a cost price of R1 800 to the branch, but the
branch has not yet received it at 30 June 20x3.
2. The branch has transferred cash of R420 to the head office at 28 June 20x3, but the
head office has not received the cash at the year-end.
3. The branch started to purchase inventory from third parties during the current financial
year.
4. Inventory counted on hand at 30 June 20x3 amounted to:
At head office R19 200
At branch R17 820 (received from head office)
At branch R 1 400 (purchased from third parties)
Head office sends all inventory to the branch at cost plus 10%. The branch adds its own
mark-up on the transfer price.
Required:
1.
2.
3.
4.
5.

Show the entries required in the head office and branchs general ledgers in order to
reconcile the inter-branch accounts at 30 June 20x3.
Calculate the amount at which inventory should be included in the statement of financial
position of Footwear Limited at 30 June 20x3 (including comparatives).
Calculate the gross profit for the branch for the year ended 30 June 20x3.
Calculate the gross profit made by head office on inventory that was sold by the
branch.
Calculate the gross profit for Footwear Limited for the year ended 30 June 20x3.

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Financial Accounting: GAAP Principles 3e

Tutorial 7.5

Chapter 7

Branches

Basic level

Crown Limited is a jewellery dealer with a head office in Kimberley and two independent
branches, one in Durban and the other in Pretoria. The head office includes a warehouse in
Kimberley, from where jewellery is sent to the branches as follows:
Jewellery sent to Durban: at cost price plus 30%
Jewellery sent to Pretoria: at cost price plus 20%
The head office and branches sell all jewellery to customers at a gross profit of 50% on the
selling price.
The following information was obtained from the 3 general ledgers for the financial year that
ended on 30 June 20x7:

Sales
Inventory on hand at 1 July 20x6
Purchases from third parties
Jewellery sent to the branches:
Durban
Pretoria
Jewellery received from the h/o warehouse
H/O current account
Durban branch current account
Pretoria branch current account

Head office
Debit/
(credit) (R)
(150 000)
15 000
157 000

Durban
Debit/
(credit) (R)
?
7 800

Pretoria
Debit/
(credit) (R)
?
6 000

52 000
(68 600)

32 400
(40 000)

(40 000)
(30 000)
68 600
43 600

The difference in the current accounts relates to inventory not yet received at the branch.
Inventory counted on hand at 30 June 20x7 amounted to:
Head office
Durban branch
Pretoria branch

R?
R5 200
R5 400

Required:
1.
2.
3.

Prepare the Branch Trading general ledger accounts in the general ledger of the head
office (separately for each branch) to calculate the gross profit realised by the head
office on jewellery sold by the branches.
Calculate the amount to be recognised in the entity financial statements at 30 June 20x7
for inventory, including the comparative amount.
Calculate the sales, cost of sales and gross profit to be disclosed in the entity financial
statements for the year ended 30 June 20x7.

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Financial Accounting: GAAP Principles 3e

Tutorial 7.6

Chapter 7

Branches

Intermediate level

Ignore VAT.
Aye Limited produces and sells high quality pet food. The pet food is produced at their
factory in Atlanta and is sold by the factory and two branches (in Port Elizabeth and Durban)
to the retail industry.
The factory transfers the pet food to the branches as follows:
Durban branch at cost price plus 20% mark-up
Port Elizabeth branch at cost price plus 15% mark-up
The branches sell the pet food to retailers after adding a further 10% on the transfer price.
The factory determines its own selling price to the retailers after adding 40% mark-up to the
cost. All inventories that are sold at the branches are received from the factory.
Aye Limited uses the perpetual recording method for inventories based on the first-in first-out
formula. The accountant provided you with the following extract from the trial balances
(before the accounts have been closed off) at 31 December 20x7:
Factory

Port
Elizabeth
R

Durban

245 000
105 000
?

120 750
615 250

78 000
469 200

321 000

215 000

108 400

1 528 800

230 820
?

68 700
?

R
DEBITS:
Durban branch current account
Port Elizabeth branch current account
Inventory 31 December 20x7:
Raw materials
Pet food
Cost of sales
Administration costs
Operating expenses
CREDITS:
Head office current account
Sales (to retailers only)
Branch trading accounts:
Port Elizabeth branch
Durban branch

98 700
271 120

?
?

Additional information:
1. R15 000 (cash) remitted by Port Elizabeth to the factory on 25 December 20x7 was not
received or recorded at the factory until 4 January 20x8.
2. Dog food (with a cost price of R25 000) transferred from the factory on 28 December
20x7 did not arrive in Durban and was not recorded by the branch until 15 January 20x8.
3. Inventory, with a retail selling price of R27 830, was returned by Port Elizabeth branch to
the factory on 10 November 20x7, and was received on 15 November 20x7 (you can
assume that these goods were still on hand at the factory at 31 December 20x7), but as
a result of an error was not recorded in the general ledger of the factory until 8 January
20x8.

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Financial Accounting: GAAP Principles 3e

Chapter 7

4. The Port Elizabeth branch reported that pet food with a transfer price of R11 500, on
hand at their depot at 31 December 20x7, had been damaged as a result of flooding on
26 December 20x7. After further investigation it was determined that the damaged dog
food could be sold to only animal farms in Atlanta for R6 000. The factory instructed the
Port Elizabeth branch to return the damaged food to the factory, which was done on 12
January 20x8, incurring transport costs of R500. No entries have yet been recorded by
the Port Elizabeth branch in respect of this damaged inventory.
You can assume that there were no inventory shortages during the year, and that all the
sales to retailers were at normal selling price for each location.
Required:
1.

2.
3.
4.

Prepare the adjusting journal entries in the books of head office and the branches to
ensure that the current accounts reconcile. Your answer should clearly indicate in which
general ledger the journal entries should be processed, as well as a reconciliation as
proof that the current accounts balance. Narrations are required. Closing journal entries
are NOT required.
Prepare an appropriate accounting policy note for inventory for Aye Limited for the
year ended 31 December 20x7.
Show how inventory should be disclosed in the notes to the financial statements of Aye
Limited as at 31 December 20x7. Ignore comparatives.
Calculate the following amounts to be included in the financial statements of Aye
Limited at 31 December 20x7:
Sales, cost of sales, and gross profit

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Financial Accounting: GAAP Principles 3e

Tutorial 7.7

Chapter 7

Manufacturing

Basic level

The following balances appeared in the trial balance of Bowman Ltd for the financial year
ended 28 February 20x6:
Dr
Inventory on hand at 1 March 20x5:
Raw materials
Finished goods (18 750 units)
Purchases raw materials
Depreciation machinery in factory
Depreciation sales motor vehicles & equipment
Direct labour factory staff (1 300 labour hours)
Salaries selling and administration staff
Rent of factory
Rent of administration building
Sales (98 700 completed units)

Cr

150 000
375 000
2 210 500
149 500
65 000
260 000
380 000
125 000
63 000
3 454 500

Normal capacity is 1 500 labour hours. You can assume that there was no incomplete
inventory and no inventory shortages during the current year.
The inventory on hand at 28 February 20x6 amounted to:
Raw materials
Finished goods (21 850 units)

Cost
350 000
?

NRV
355 000
R35 / unit

Bowman Ltd has always applied the following accounting policy to its inventory:
Inventory on hand is measured at the lower of cost and net realisable value. Cost is
determined by applying the FIFO costing formula. The cost price of manufactured inventory
is determined by allocating an appropriate portion of fixed overhead costs.
Required:
Prepare the journal entries, relating to the manufacturing process only, for the financial year
ended 28 February 20x6, to calculate correctly the carrying value of finished goods inventory
at 28 February 20x6. Narrations are not required.

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Financial Accounting: GAAP Principles 3e

Tutorial 7.8

Chapter 7

Manufacturing

Intermediate

Fairways Limited produces electrical equipment that is sold to the retail market. The
company uses the perpetual recording system to record its inventory transactions, and
measures the cost of raw materials and finished goods on the FIFO method.
The company incurred the following expenditure during the current year:
Purchase price of raw materials: R300 000
Cost of unloading the materials into the raw material storeroom: R2 000
Salary of raw materials storeroom worker: R45 000 (fixed)
Salaries of machine workers in factory: R150 000 (variable, 12 500 labour hours)
Salary of production supervisor : R10 000 (fixed)
Depreciation of the machinery used in production process: R60 000 (fixed)
Factory electricity usage charges: R15 000 (of which 50% is fixed)
Consumables purchased: R12 000
Factory rental: R50 000 (fixed)
The fixed overhead costs are allocated to the production process based on normal capacity
of 13 800 labour hours of the machine workers per annum.
You obtained the following extract from the draft financial statements of Fairways Limited for
the year ended 28 February 20x10 (its current reporting period):
Inventories:
Raw materials
Finished goods
Consumables

28/2/20x10
R
54 000
?
7 500

28/2/20x9
R
36 000
120 000
5 000

Cost of sales, included in Profit and loss for the year ended 28 February 20x10, amounted to
R596 250 (20x9: R514 000). The consumables are used in the production process.
There were no incomplete products on hand at any of the reporting dates.
Required:
Prepare the journal entries relating to the production process and inventory only, for Fairways
Limited for the year ended 28 February 20x10. Dates and narrations are not required.
Closing journal entries are not required.
The carrying amount of Finished goods inventories at 28 February 20x10 amounted to
R_______________ .

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Financial Accounting: GAAP Principles 3e

Tutorial 7.9

Chapter 7

Inventory disclosure

Intermediate

Assume a VAT rate of 14% in this part of the question.

You are the newly appointed accountant of Highveld Air Conditioners Limited (HAC). The
company imports air conditioners which are supplied and installed in business offices and
households across the country. HAC has always applied the weighted average costing
formula to value its closing inventory, based on the lower of cost and net realisable value.
The weighted average cost per unit is calculated at each reporting date. HAC records
inventory transactions on the periodic method.
At 28 February 20x4 (the companys prior reporting date), HAC had 400 Model-A20 air
conditioners at a total cost of R258 400 on hand.
The following transactions relating to Model-A20 air conditioners occurred during the year
ended 28 February 20x5:
1.

The following air conditioners were received during the financial year:
Date received:
1 August 20x4
1 February 20x5

2.

3.

Units
1 000
800

Total landed cost (excl. VAT)

R659 440
R452 760

The builder of a new townhouse development ordered and paid for 20 Model-A20 air
conditioners on 15 November 20x4. The development of the townhouses was delayed
during the holidays and is only expected to be completed during May 20x5. The sale of
these air conditioners was included in the sales for the year, but the air conditioners were
still on hand in the storeroom at 28 February 20x5, and were included in the inventory
count (see point 3 below). In terms of the agreement with the builder, he accepted full
responsibility for the air conditioners while they were being held in storage by HAC.
HAC counted 775 Model-A20 air conditioners (in units) in its storeroom at 28 February
20x5. Upon further investigation, HAC noticed that 113 of the Model-A20 air conditioners
on hand at 28 February 20x5 were damaged and estimated that it would cost R571 each
to repair them before they can be sold at normal selling price.

The air conditioners are sold at a fixed selling price of R1 254 (incl. VAT). You can assume
that there were no inventory shortages during the financial year.
Required:
1.

Show how inventory should be disclosed in the notes to the statement of financial
position at 28 February 20x5 (including comparatives). The accounting policy note for
inventory is not required.
Show all your workings clearly.
Round the weighted cost per unit to the nearest rand.

2.

Briefly discuss how your answer in point 1 above would be different if the company
applied the first-in-first-out formula to value its closing inventory. Your answer should
include the closing balance of inventory calculated when applying the first-in-first-out
formula.

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Financial Accounting: GAAP Principles 3e

Tutorial 7.10

Chapter 7

Classification of expenses

Advanced

Ignore VAT.
Racket Sports Limited is involved in the manufacture of fashionable sport racquets that are
sold to large sport shops and retail groups. Their main line of production includes tennis and
squash racquets, produced at a normal capacity of 40 000 labour hours per annum. It takes
the same amount of time to produce one tennis racquet as it takes to produce one squash
racquet.
The company accounts for its inventory on the perpetual inventory method, and the cost
price of closing inventory is measured by using the first-in-first-out-basis, which includes an
appropriate allocation of fixed overhead costs, charged to production based on labour hours.
Actual labour hours worked during the current year amounted to 38 500 hours.
You are assisting the accountant in preparing the financial statements for the company for
their financial year, ending on 29 February 20x4, and have obtained the following
information:
1.

The cost of inventory on hand at the beginning and end of the 20x4 financial year was
as follows:
28 February 20x3
Raw materials
Incomplete racquets:
Tennis racquets
Squash racquets
Completed racquets:
Tennis racquets
Squash racquets
Cover bags

29 February 20x4

Quantity
n/a

R
122 500

Quantity
n/a

R
187 500

15
12

925
725

24
16

1 800
1 500

2 550
1 830
500

306 000
247 050
5 000

640
2 060
?

73 600
288 400
?

Each racquet is sold with a specially designed cover bag with a logo. The company does
not produce these covers, but orders them in bulk at the beginning of each new
production line, based on the estimated number of racquets that will be produced. The
company ordered 14 500 new covers during the year, for R153 700. You can assume
that there were no inventory losses during the year.
2. The following salaries were paid during the 20x4 financial year:
Executive salaries (5 executives)
Salaries and commissions paid to sales representatives
Administrative personnel salaries
Wages paid to production personnel (based on 38 500 actual
hours)
Performance bonuses paid (see below)

R
2 000 000
715 000
380 000
405 900
500 000

Two of the company executives are involved in the production process. The production
manager spends all his time in the production process, while the quality control manager
usually spends 25% of his time in the production process checking the quality of the
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Financial Accounting: GAAP Principles 3e

Chapter 7

racquets to ensure that the prescribed standards are met. The balance of the executive
salaries is for administrative duties. The company executives receive equal salaries.
Performance bonuses paid during the year (see above) related to the administrative and
production personnel only. You have determined that 20% of the bonuses related to
payments to administrative personnel.
3.

The company rents the premises that it occupies, and the monthly rent payment
amounts to R15 500. According to the rental agreement, a deposit of R25 000 was paid
on 1 March 20x3, when the contract was signed. This amount is refundable at the end of
the contract. The selling department occupies 10% of the premises, 15% is used by the
administrative department and the rest of the premises is used in the production
process.

4.

According to the fixed assets register of the company, the following assets are held and
depreciated during the year:
Department
Machines and equipment
Machines andequipment
Delivery vehicles
Motor vehicles
Motor vehicles
Production plant

5.

Administration
Factory
Selling
Selling
Administration
Factory

Annual depreciation
R
35 000
39 000
12 000
15 500
52 160
21 500

Carrying value
R
145 000
160 000
1 022 000
1 650 000
2 807 000
2 380 000

Other expenses incurred during the year included:

R
Printing and stationery evenly incurred between
administration and selling departments
Petrol and services of motor vehicles of sales representatives
Water and electricity premises (refer to note 1 below)
Bank charges
Advertising and promotions
1

6.

25 500
13 800
180 000
7 000
23 000

Water and electricity are considered to be a variable overhead, of which 90% is used in
the factory. The remaining 10% is used evenly between the administrative and selling
departments.

During the year, the company purchased raw materials (excluding consumables) to the
value of R1 250 000, of which 15% was still on hand at 29 February 20x4. Raw materials
to the value of R15 000 used in the production process were destroyed on
29 September 20x3, resulting from a fault in one of the production machines.
Consumables (that is, indirect materials) used in the production process amounted to
R540 000. These items are ordered when required, and no inventory was held on either
of the respective reporting dates.

Department of Accounting, UCT and Oxford University Press Southern Africa

Financial Accounting: GAAP Principles 3e

7.

Chapter 7

Summary of the sales ledger for the 20x4 financial year:

Quantity
At normal selling price:
Tennis racquets
Squash racquets
Promotional sales:
Tennis racquets
Squash racquets
Total

8.

5 850
5 300

3 470 260
3 180 000

1 450
700
13 300

217 500
93 240
6 961 000

Promotional sales are made frequently during the year. The company has just completed
the production of 50 new squash racquets, with the intention of selling these on
promotion at 15% below cost. These squash racquets are all complete and on hand at
29 February 20x4, as the promotion is planned for 10 March 20x4.

Required:
1.

2.

Prepare the journal entries to record all the transactions relating to the manufacturing
of inventory for the year ended 29 February 20x4. Assume that the entries to record
initially all expenses incurred during the year have been made. Closing journal entries
and narrations are not required.
Prepare the Statement of comprehensive income (by allocating the expenses
according to their function) for the year ended 29 February 20x4. No notes other than
those relating to operating costs on a function basis need to be presented.
Show all your workings clearly.

Department of Accounting, UCT and Oxford University Press Southern Africa